Quarter 3 - Module 11: Government Intervention in Market Prices: Price Floor

Summary

This lesson explains the concept of price floors, focusing on their impact in various markets, including goods and labor. A price floor is the minimum legal price set by the government, such as the minimum wage. The lesson uses real-world examples, such as the sandwich market and labor market, to illustrate how price floors create surpluses by encouraging producers to supply more while reducing consumer demand. The lesson also covers the potential negative effects, like unemployment in low-skilled labor markets, and emphasizes the need for balance in government intervention to prevent market imbalances.

Takeaways

• 😀 Price floor refers to the legal minimum price set by the government for certain goods or services.
• 😀 Price floor is typically set above the equilibrium price to prevent prices from falling too low.
• 😀 The most common example of a price floor is the minimum wage law, which ensures workers receive a minimum wage for their labor.
• 😀 In a market with a price floor, when the minimum price is above the equilibrium, a surplus occurs, where supply exceeds demand.
• 😀 In the sandwich market example, a price floor of 25 pesos results in a surplus of 40 sandwiches due to decreased demand and increased supply.
• 😀 Price floors in the labor market, such as minimum wage laws, can lead to a surplus of workers, meaning more people want jobs than there are available positions.
• 😀 At a higher minimum wage, the number of workers willing to work increases, but the number of workers employers are willing to hire decreases, resulting in unemployment for low-skilled workers.
• 😀 The effect of a price floor is to support certain sectors or groups, but it may also lead to inefficiencies such as surplus goods or unemployed workers.
• 😀 Price floors are sometimes called price supports because they prevent prices from falling below a certain level, effectively supporting the market.
• 😀 Government intervention, such as setting price floors, can have unintended consequences like reduced employment opportunities or excess supply in the market.

Q & A

What is a price floor?

A price floor is the minimum legal price that can be set for a good or service, preventing prices from falling below a certain level.

What is the most common example of a price floor?

The most common example of a price floor is the minimum wage, which sets a legal minimum for the amount workers can be paid.

What happens when a price floor is set above the equilibrium price?

When a price floor is set above the equilibrium price, it leads to a surplus. Suppliers are willing to produce more of the good or service than consumers are willing to buy.

How does a price floor impact the demand and supply of goods in the market?

A price floor causes a decrease in the quantity demanded and an increase in the quantity supplied, leading to a surplus in the market.

In the sandwich example, what happened when the government set a price floor of 25 pesos?

When the price floor was set at 25 pesos, the quantity demanded decreased from 60 to 40 sandwiches, while the quantity supplied increased from 60 to 80 sandwiches, creating a surplus of 40 sandwiches.

What effect does the minimum wage have on the labor market?

Setting a minimum wage above the equilibrium wage causes a surplus of labor, as more workers are willing to work at the higher wage, but employers only hire a limited number of workers.

What happens in the labor market when the government sets a minimum wage of 600 pesos?

If the minimum wage is set at 600 pesos, more workers (800) are willing to be employed, but only 400 workers will be hired, resulting in a surplus of 400 workers.

Why do employers substitute machines or high-skilled workers for low-skilled workers when a price floor (minimum wage) is set?

Employers may substitute machines or high-skilled workers for low-skilled workers when the minimum wage leads to a surplus of labor, as they seek to reduce costs by hiring fewer workers.

How does a price floor on basic commodities, like food, affect consumers and suppliers?

A price floor on basic commodities can lead to higher prices for consumers, which might reduce demand. For suppliers, however, it ensures that they can sell at a price above the market equilibrium, potentially leading to overproduction or unsold goods.

What are the benefits and drawbacks of implementing a price floor, such as minimum wage or price controls on goods?

The benefits include protecting workers or suppliers by ensuring a minimum price, but the drawbacks include potential surpluses (e.g., unemployment or unsold goods) and inefficiencies in the market.